Image shown: Dollar General’s share price performance since early 2017. It was first highlighted in the simulated Best Ideas Newsletter portfolio in April 2017.
Simulated Best Ideas Newsletter portfolio idea Dollar General turned in a solid fiscal second quarter report and subsequently raised its top-line guidance. Shares have advanced nearly 60% since we first highlighted the company, and its business continues to be a model of consistency.
Kris Rosemann
Simulated Best Ideas Newsletter portfolio idea Dollar General (DG) continues to drive its top line higher, and its consistently positive same-store sales growth over the past nearly three decades has been nothing short of impressive. Its fiscal 2018 second quarter report, results released August 30, only reaffirmed such a notion. Strength in consumables, seasonal, and apparel categories helped drive same-store sales growth of 3.7% from the year-ago period, which was partially offset by weakness in the home category. Both average transaction amount and customer traffic were higher in the period, and strong same-store sales growth helped drive net sales to 10.6% growth on a year-over-year basis.
Dollar General’s gross margin faced slight pressure (contracted by seven basis points) in its fiscal second quarter as a result of a higher mix of consumables sales, higher markdowns, and increased transportation costs, which were partially offset by improved inventory management and higher initial markups, but SG&A spending as a percentage of revenue fell to 22.2% in the quarter from 22.3% in the year-ago period. A significantly lower tax bill also helped the company realize materially improved bottom-line results as net income came in at $407 million in the quarter compared to $295 million in the prior-year period and diluted earnings per share leapt 40.7% from the comparable quarter of fiscal 2017 to $1.52.
The company’s bottom-line growth translated nicely onto its cash flow statement as cash flow from operations through the first 26 weeks of the fiscal year came in nearly 40% higher than the comparable period of fiscal 2017, and free cash flow jumped roughly 54% on a year-over-year basis to $726 million despite capital spending growing more than 18%. Cash dividends paid in the first half of fiscal 2018 came in at ~$155 million, suggesting ample coverage of dividends with free cash flow, even after considering the $350 million in repurchases of common stock in the period. Though not a core part of our rationale for highlighting shares of Dollar General in the simulated newsletter portfolio, we view its dividend as healthy given its free cash flow coverage, despite its net debt position of ~$2.5 billion as of the end of the second quarter of fiscal 2018. Shares yield ~1.1% as of this writing.
Dollar General raised its fiscal 2018 guidance following its strong second quarter, and it now expects net sales to grow 9%-9.3% (was 9%). It also raised its same-store sales growth expectations to the mid-to-high two percent range (was mid-two percent range), but its operating margin is still expected to be roughly flat with that of fiscal 2017. The company also reiterated its diluted earnings per share guidance in a range of $5.95-$6.15, and it still plans to open ~900 new stores, remodel ~1,000 stores, and relocate 100 stores in fiscal 2018.
Shares of Dollar General are currently trading in the upper half of our fair value range, and we expect to continue highlighting the company in our simulated Best Ideas Newsletter portfolio. The company’s track record of consistency cannot be ignored, and we’re comfortable letting this idea continue to showcase its strength in the face of the proliferation of e-commerce, which has yet to make its way to the dollar store discount space.
Dollar General was first highlighted in the simulated Best Ideas Newsletter portfolio in April 2017 at $68.83 per share. Since then, shares have surged nearly 60%, and that is without considering the impact of dividends, modest as they may be. We can only hope our members have been as excited about this idea as we have been!
Retail – Discount: BIG, DG, DLTR, FRED, PSMT
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.